1. Risk Identification: It consists of identifying various risks associated with the risk
taking at the transaction level and examining its impact on the portfolio and capital
requirement.
2. Risk Measurement: It seeks to capture variations in the earnings, market value, losses
due to default etc. arising out of uncertainties associated with various risk elements.
Quantitative measures of risk can be classified into- based on sensitivity, based on
volatility and based on downside potential.
3. Risk Pricing: Risk in banking transaction impact banks in two ways- (i) banks have to
maintain necessary capital which is not without cost (ii) there is a probability of loss
associated with all risk which needs to be factored into pricing. Risk pricing implies
factoring risk into pricing through capital charge and loss possibilities. This would be in
addition to the actual costs incurred in the transaction. Pricing takes following things into
account- (i) cost of deployable funds (ii) operating expenses (iii) loss possibilities and
(iv) capital charge.
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